Any mention of the tapering of QE from Ben Bernanke, chairman of the Federal Reserve, on the other hand, and markets are hit with a crisis of confidence.
Investors are not convinced the global recovery can get faster and stronger without the added oxygen (low rates) and hydration (liquidity) provided by central bankers.
Bull vs. bear
So far there are two main schools of thought as to how the scenario could pan out from here:
1. The Fed will signal early and often that it is going to withdraw support and do so slowly and softly. In this way the ‘bad news’ will already be priced into the market long before the carpet is gently tugged from under our feet. People who follow this theory also think the Fed will only start to rein in QE when the recovery is strong enough to be self-sufficient and so companies (and their shares) will not be adversely affected.
If you think the rally is set to continue, find out the seven money-making masters of the bull run here…
2. We will see a repeat of 1993/94 when the Fed under Alan Greenspan acted very abruptly in raising interest rates. This will prompt a short, sharp correction in both bonds and equities, although the timing of the withdrawal of QE is by no means certain.
Read our five funds that have your back should equities tumble here…
I’m sure there will be other predictions out there, so please leave a comment in the box at the bottom of the article if you believe there is a ‘third way’.
Depending on which side of the fence you fall on, the ways you position portfolios will differ.
Planning ahead
Haig Bathgate, CIO at Turcan Connell Asset Management, says he has firmly positioned client portfolios for inflation.
“Central bankers tend to wait for confirmation on the way out of a crisis, so the recovery will have to become very entrenched in the US before the Fed will contemplate increasing interest rates. We are expecting a sell off when interest rates start to rise but think things have to get materially better before that happens, which will work for equities in the meantime.
“When markets were moving from risk on to risk off in phases it did not matter which kind of companies you were in. Now we are moving into a more stable period and tail events are diminishing, what we are seeing is correlation between markets and companies falling. There are differences in share price movements and it is a period in which active managers will make a difference.”
Managing correlation
David Coombs, head of multi-asset investing at Rathbones, says no matter how QE is stopped it will impact both bonds and equities and so funds with low correlation to both asset classes will be a boon.
He points to the Ignis Absolute Return Government Bond Fund managed by the rates team over at Ignis: “I’m not saying it is the best fund, just that it is the kind you want to be looking at,” he added.
Other funds that fit into this camp are the M&G Macro Bond Fund and JPM Income Opportunities Fund.
“We have been worried about this since the start of the year so have brought our duration to zero in the fixed income part of the portfolio, sold our EMD and high yield and have very little investment grade left. We have increased equity exposure but hedged it with put options.”
Time to act
Meanwhile, Tristan Hanson, head of asset allocation at Ashburton, thinks there is still some time to make asset allocation decisions:
“We have seen a fall-off in equity and bond markets. The question is to what extent are these moves part of a structural trend? US treasuries have been hit pretty hard and so have a number of bond markets around the world. Do we want to use the recent weakness in those currencies and bond markets to add a bit of exposure?
“It is a bit of a lazy consensus to be bullish equities. Everyone looks around various asset classes and thinks there are no returns to be had in fixed income so it will have to be equities. Over three to five years I would agree with that view but it does not mean we cannot get corrections along the way," he concluded
How are you positioning your portfolio for the threat of tapering ahead? Let us know in the comments box below…
